Tag Archives: Egypt energy subsidies

Why Egypt’s Energy Bill Is Higher Than Official Figures Suggest

This guest post is by Stefanie Heerwig, a freelance journalist and researcher at Openoil, a Berlin-based energy consultancy and publishing house. 

Egypt’s energy bill, already a whopping $17 billion, is probably much higher than official figures suggest.

The country is losing billions in petrodollars because it isn’t taking advantage of the international market where oil can be sold at much higher prices, nor is it closing up channels that breed corruption and allow hidden subsidy costs to take hold.

Officially, energy subsidies account for 20% of Egypt’s budget, costing the government $17 billion every year, but it is likely the government actually spends much more on subsidies every year.

1. Missing out on “opportunity costs”

If the government would account for the opportunity costs (sometimes also referred to as economic costs) of energy subsidies, it’s subsidy bill would be at least 50% higher than the official figure.

This is the money the Egyptian government loses by not selling fuel at the international market price, but at far cheaper rates.

That means the state-owned oil company, the Egyptian General Petroleum Corporation, provides energy at a cheaper price for the domestic market, when it could be taking advantage of the lucrative international oil market.

The difference between the profit that the EGPC could have made from selling the fuel internationally and the oil it sells domestically at a subsidised price is the “opportunity cost”.

In order to capture this opportunity costs, economists use the so-called price gap approach.

2. Lending between ministries has opened up channels for corruption and hidden subsidy costs

The government has made it almost impossible to track the true costs of energy subsidies.

That’s because of poorly recorded budgets and unnecessarily complex bureaucracy between the oil, electricity and finance ministry.

Samir Radwan, a former Egyptian finance minister explained how this internal bureaucracy works:

“When the EGPC provides fuel to the Ministry of Electricity, its sells it at the subsidised price. The Ministry of Electricity, in turn, collects revenues from electricity sales and pays them to the Ministry of Finance which issues a bond to the Ministry of Electricity.

But the subsidies are recorded as an expenditure at EGPC. It would be more correct, however, if EGPC would sell fuel at the international market price to other entities and then account for the subsidies as a loss.”

Intra-governmental funding has made it even more difficult to track how much subsidies are costing the nation and an “amazing labyrinth of connections between different ministries and different entities of the government,” Radwan says.

This only serves to undermine official figures.

But more worrying still is that the convoluted internal financing mechanism is masking an accumulation of intra-governmental debt. The Ministry of Electricity not only owes money to the EGPC and the Ministry of Finance (according to estimates, the Ministry of Electricity pays about 200 million Egyptian pounds a month to the EGPC), but is also owed funds and debts by other ministries and entities.

The question now is: how will the government undertake any energy subsidy reform, if it is not even able to track its own subsidy records?

Why “Smart” Cards Are Stupid

This guest post is by Stefanie Heerwig, a freelance journalist and researcher at Openoil, a Berlin-based energy consultancy and publishing house. 

As the dust settles after Egypt’s latest wave of fuel shortages, the conspiracy theories about why there was a sudden recovery in fuel supply after Mohammed Morsi’s ouster are also fading away, until the next time there are chronic shortages.

But one thing the interim government won’t be able to forget is how to get over the country’s addiction to energy subsidies, a system which has bred an entire parallel black market.

As much as 20% of subsidised fuel is thought to have been siphoned off through corrupt activities. 

In fact, anecdotal evidence suggests that sometimes smuggling fuel is perfectly legal, highlighting the failure of Egypt’s bureaucracy rather than the energy subsidies.

For example, truck drivers on the agricultural route between Alexandria and Cairo say farmers who need diesel to operate their machinery can easily get hold of a government permit to access larger amounts of subsidised fuel from petrol stations. The only proof the government needs is evidence they own farming machinery. This very unofficial process has encouraged many to sidestep the system, getting more than their fair share of energy products.

This is part of the reason why the “smart” card system, where fuel will be sold through ration cards, will not be enough to reform Egypt’s energy subsidies: simply because legal mechanisms can be so easily circumvented and on such a large scale. 

Incoming Egyptian officials may be depending on the “smart” card scheme to work to ultimately phase out untargeted energy subsidies that favour the rich, and not the poor, but there are some key reasons why the project is unlikely to work. Here are just a handful:

1) The smart card will be an open door for corruption and leakages.

According to the government, the cards will be distributed at post offices, traffic points and branches of the Bank for Development and Agricultural Credit against the presentation of a traffic license (people with vehicles without licenses will get cards from September).

2) In a country where government administration is pure chaos and piles of money and papers are lost among 36 non-computerised ministries, how easy will it be to bribe someone to get more than one smart card or lose consumer information?

3) The ministry of petroleum have reassured Egyptians that they have started to track the movement of fuel from storages to petrol stations via the smart cards, in the first phase of the reform, in an attempt to clamp down on black market dealers and smuggling.

However, deeper investigation shows that the system has only tracked fuel from a single refinery (in Mostorod) to a handful of stations in Cairo and Giza since June. The ministry has admitted that it has not built a database yet which makes it highly unlikely the government is aware of the country’s complex fuel network and how it should work.

This is worrying and it is unclear whether the government is truly aware of the scale of the reform.

4) If officials don’t even have an overview of the distribution mechanism of fuel, how will they manage to distribute smart cards to all vehicle owners in Egypt within a month’s time as promised?

Assuming that every third person over the age of 18 owns a vehicle, this would mean the production and usage of 18 million smart cards, which means a lot of work and organisation ahead.

All in all, this is a logistical nightmare and the body of evidence that shows why Egypt’s proposed reforms won’t work is growing.

It’s time for Egypt to rethink its approach and reinvent energy subsidies.

Is Egypt’s Fuel Crisis Over?


That’s the short answer. Here’s the long one:

I’m afraid Egypt still has a long way to go before we never experience a power cut or experience gas shortages again.

The country’s fuel shortages seemed to have miraculously disappeared, just as Islamist president, Mohammed Morsi was overthrown. There were no gas lines and suddenly no electricity cuts:

“We went to sleep one night, woke up the next day, and the crisis was gone,” Ahmed Nabawi, a gas station manager told the New York Times.

Supporters of the interim government predictably seized on this saying the “improvements in recent days were a reflection of Mr. Morsi’s incompetence, not a conspiracy,” according to the NYT story.  While the former president is guilty of a lackadaisical approach to the economy, there is little truth in this.  It looks more like severe wishful thinking shared by Morsi’s opponents after his ouster. 

First of all, there have in fact been power cuts and long queues for gas since Morsi’s ouster. I experienced a power cut myself yesterday and I’m lucky enough to live in the quite pleasant island of Zamalek.  Journalists who travelled to the Upper Egypt city of Beni Seuf in recent days also witnessed extended queues for gas at petrol stations there.

The second point, a technical but very important one, is that much of the gas used in cars is actually refined locally. It is not imported from other countries, so any explanation that has attributed the queues to fill up gas tanks to the wider economic downturn is inaccurate. Egypt imports gas and other types of energy products for factories, businesses and power stations, not for cars.

Thirdly, for those conspiracy theorists out there, it is very likely that the Gulf money to Egypt was part of quite a substantial reward arrangement.  Therefore, the removal of Morsi would have seen the $12 billion (which includes a hefty supply of badly needed oil products) from Saudi Arabia, the United Arab Emirates and Kuwait funnelled through a few days earlier than it had been announced, lessening pressure on demand for energy locally.

Fourthly, the simplest answer is usually the right one.

Did anyone consider the fact that as millions of Egyptians took to the streets, very few people were actually at home or at work using electricity or filling up their cars? It is rational to expect that with business pretty much at a standstill on the anniversary of Mohammed Morsi’s presidency, the demand on domestic energy was actually quite low, meaning we were in a comfortable position for the days leading up and after his ouster.  Electricity-generating power stations are by and large run with natural gas, and with demand much lower for that week, it’s likely the capacity would not have been overcome as it has in the past.

There are other “theories” out there that suggest the Army used its own funds to pay for fuel, and “Saved Egypt”.  Groups blamed each other.

Some liberals suggested that the Muslim Brotherhood was behind the fuel shortage as an attempt to demobilise the masses and prevent large demonstrations from forming. But others who served under Morsi said there was a conspiracy to create a crisis from the opposition:

“This was preparing for the coup,” said Naser el-Farash, who served as the spokesman for the Ministry of Supply and Internal Trade under Mr. Morsi. “Different circles in the state, from the storage facilities to the cars that transport petrol products to the gas stations, all participated in creating the crisis.”

Forget these hypotheses that are not proved and will probably remain that way.

What is clear is that the country’s addiction to subsidies is still very much a problem, and that this eclipses every single theory on how shortages may or may not have started or ended. Of course, Mohammed Morsi made many mistakes, as detailed here.

But Egypt, has for a long time, bought energy products at international prices, and sold these locally at a severely subsidised price, costing the nation billions of dollars (in fact energy subsidies swallow up to a quarter, and increasingly more, of the budget – more than what is spent on health and education combined).

Not only is this an expensive way of distributing subsidies, but the system is not targeted so effectively everyone gets cheap fuel – and the rich naturally consume more of it, leaving the poor still in need.  Add to that, Egypt has actually begun consuming more energy than it is producing, exacerbating the problem. This problem may have been inherited by Morsi, but it is not his fault.

The painful truth is that when a new government convenes, it will be up against the same debilitating problems that Morsi’s administration was having difficulties with. Nasser created subsidies, but neither Sadat nor Mubarak or Morsi would touch them.

Who will dare to be the fact that is associated with these reforms? 

Instead of focusing our energy on these pointless theories that are fabricated by those who are greedy for power, the interim government should focus on how to relieve pressure building up as a result of  this system soon, before Egypt experiences another bout of shortages which will no doubt be blamed on one unsuspecting group.

Egypt’s Biggest Oil Debts

Egypt’s state oil company, the Egyptian General Petroleum Corporation, is in big trouble. 

It has racked up billions of dollars of debt in the last decade with some estimating its dues to banks and oil companies is as high as $20 billion.

The magnitude of EGPC’s debts is such that it would be rare to find an oil company in Egypt which is not owed money.  The growing debt pile highlights the government’s struggle to meet its rising energy bills while trying to keep subsidised prices to avoid public unrest.

This Reuters story describes the problem in a nutshell:

Egypt has been delaying payments to firms producing oil and gas on its territory as it has struggled with dwindling currency reserves, rising food bills and sliding tourism revenues since the 2011 revolution that overthrew Hosni Mubarak.

Most oil firms hope to recoup the debts in full, but they acknowledge it could take years. While they are still planning to invest in new projects in Egypt that will help it avoid an energy meltdown, the debt situation remains a challenge.

The government’s delay in paying its debts to oil and gas producers could hold back investment in the sector and potentially endanger Egypt’s energy security.

But exactly how many companies have been impacted and what kind of money are we really talking about?

The following spreadsheet, acquired by Rebel Economy from an investment bank which has major interests in Egypt’s energy, lists the debts owed to no less than 42 companies for oil and gas exploration.

The spreadsheet shows that while a number of small companies are owed money, several large energy companies have achieved special repayment deals with the government.

Of the companies listed, Italy’s ENI agreed to allow EGPC to delay on a $100 million payment, the UK’s BP agreed to defer $600 million, and BG Group also of the UK, $589.8 million.

The spreadsheet ends January 2012, but it one of the clearest barometers of the scale of EGPC’s debt to oil companies that has been made public. Even this document is seen as portraying a conservative total debt figure of only $3.44 billion when actual debts to oil firms are estimated to be at least $5 billion.

If you want to look at this in more detail, click here.

Yet this is just the tip of the iceberg.

EGPC’s debts to banks, to countries that are lending the country fuel at sometimes preferential rates, and even debts to other ministries (the finance ministry has injected billions of dollars to the electricity ministry) set a frightening precedent for what Egypt is facing today.

With Egypt’s inefficient and costly energy subsidy system at the core, this is yet another example of why the country must take long-term steps to reform the system or be forever in debt to others. 

Reinventing Egypt’s Energy Subsidies

It is easy to get weighed down in the debate over energy subsidy reform in Egypt.

After all, the Egyptian government has done a good job of confusing us by announcing a multitude of different measures that have mostly evaporated into thin air.

In fact, major government measures have actually aggravated the problem. 

In December, the subsidy on 95-octane petrol used by the wealthiest Egyptians was scrapped. That drove some motorists to buy lower-grade fuel, raising the demand for subsidised 92-octane gasoline.

Then, in a bid to prevent smuggling and other abuses,the government restricted distribution of heavily subsidised low-grade gas oil used by trucks, tractors and buses to filling stations owned and operated by the military. All this caused was longer lines at the pumps and increased economic disruption.

Finally, in April, Egypt raised the price of subsidised cooking gas canisters to 8 Egyptian pounds (roughly $1.17) from the previous 5 pounds ($0.73) but this also sparked scepticism considering only poorer households use gas cylinders and the money raised from price lift was minimal.

Meanwhile, many other initiatives have not moved forward.

In November 2011, the cabinet issued a decree to end subsidies on natural gas to energy-intensive industries in January 2012, but this did not occur. Similarly, the minister of supply and internal trade announced a new coupon system for distributing butane canisters in September 2011. The plan would distribute 14 million ration cards to the neediest Egyptians. It was supposed to be initially implemented in two sparsely populated governorates, then rolled out to other governorates, but was not.

Finally, the government continues to delay a nationwide plan to introduce ration cards nationwide for subsidised fuel. Once slated for July (which itself was a delay from April) is now planned for September, the country’s new oil minister Sherif Haddara has said.

One thing everyone agrees on is that energy subsidies must be reformed and the current system is untenable. Here’s why, in a nutshell:

Egypt has a system of subsidies for commodities such as petroleum and flour that is hugely expensive and works very poorly.

It spends about 20% of its national budget on keeping down fuel prices for the general public even though it pays out more to support wealthier households whose fuel consumption is higher than in needier ones. The public debt is further swelled by the fact that, because of Egypt’s declining domestic output and the sporadic disruption caused by strikes, a growing portion of the subsidised petrol and natural gas is imported.

However, the Morsi government is unlikely to tempt fate by altering the fuel subsidy status quo amid the uncertainty over the parliamentary election expected in October.

So what is going wrong?

Apart from the general incompetence of the Morsi administration, experts in the oil industry reckon Egypt’s proposed reforms just won’t work and the country needs to rethink its approach.

Rebel Economy spoke to Johnny West, who runs OpenOil, an energy consultancy which promotes transparency in the oil and gas industry. This is a brief overview of what he would propose: 

  • Why won’t the ration card system work in Egypt?

Any solution which involves calibrated targeting (like ration cards) will fail because there has not been any history of successful implementation in the past.  Anything which involves targeted distribution, coupons or an allowance is going to be abused because it allows corruption or abuse of the system, and administrative error to potentially damage the system. 

Plus the administration is under increased pressure and decreased capacity to deliver.  It wasn’t even able to deliver in less-stressed times. 

  • What do you propose?

There’s a much simpler way to do this which is to create direct cash dividend which is absolutely flat for everyone in the population and therefore does not needed to be targeted.  At the moment you have 93% of the gas subsidy consumed by 20% of the richest Egyptians, so this guarantees that everyone gets a fair share. 

  • Through what mechanism?

You would encourage the mobile phone networks, or any number of other ID systems to act as a food distribution network system.  This type of system has also worked in far more degraded environments than Egypt, for example the United Nations used a similar food distribution network in Haiti after the 2010 earthquake. 

In addition, 10% of Kenya’s gross domestic product is transferred using a mobile-phone money transfer service called M-Pesa.  Egypt’s mobile penetration is almost 100%, so this system is realistic. 

  • Talk us through how it would work.

 You wouldn’t liberalise all prices immediately but through quarterly implementations of staggered price rises over 5 years. Instead, all Egyptians would receive a dividend upfront so money is in their hand before any price rises take place. 

Based on the 2010/2011 budget, you are talking about 30 Egyptian pounds ($4.30) per adult per month. 

The system is entirely self-financing, and given the current urgency of the energy subsidy problem, Egypt would realistically implement this system, with very little preparation. You would need better demographic data of all Egyptians but than can be achieved in a month. 

  • The system seems too good to be true. What criticism has it attracted?

There’s an inbuilt bias, particularly against the Muslim Brothers, that this system is unfair as it subsidises the rich. Everyone would get a subsidy, including Naguib Sawiris, but our perspective is that energy resources are not government-owned but belong to the people. 

In almost all countries of the world, apart from the USA and Canada, citizens are shareholders of the country’s resources and the government is only acting as steward on those resources. Therefore in all activities we see, revenues that would accrue from that would belong to the citizens. 

One objection is that it is bad to give something for nothing, while another is that it represents a weakening of the government because the system is less reliant on the state. But we say the government is about legitimacy not control.

Ultimately, a flat dividend has a much higher chance of gaining political consensus than targeted saving which would see some not get any subsidy, and others receiving a monthly welfare package. 

 The cost of subsidies is also very much a global issue, costing $600 billion. There is massive consensus on the need to reduce but different perspectives on how to do this.

A flat dividend would address the urgent need to reform subsidies, gain broad consensus and be a first step to more complex calibrated systems further down the line. 

Egypt Lifts Cooking Gas Prices, Why it’s Trivial

How fitting that on April Fool’s Day, the Egyptian government attempts to deceive us all by claiming that its plans to raise the price of state-subsidised cooking gas for the first time in two decades will actually make any difference to the country’s energy subsidy spending. 

In fact, it won’t, and it is unlikely that the IMF delegation visiting Cairo this week will see it this way. 

According to Reuters:

The government  increased the price of cooking gas cylinders sold for domestic use by 60% to 8 Egyptian pounds [That’s from 5 pounds] a bottle, and doubled it for the bigger bottles used by businesses, an official at the supplies ministry said.

Although it marks a big rise, Egyptians had grown used to paying as much as 50 pounds a bottle last year on a black market where the state-subsidised gas bottles are sold at a mark-up. Those prices have now fallen to 10 to 15 pounds a bottle, according to Egyptian media reports.

There are a number of holes in the policy that fit in well with the Egyptian government’s ad hoc approach to economic policy. Moustafa Bassiouny, economist at the Signet Institute explains:

A) Raising the price of a gas cylinder from LE5 to LE8 is unlikely to result in any substantial savings for the government who are struggling to meet demand for fuel. [Rebel Economy: It’s really just symbolic].

B) This type of fuel is predominantly used by the poor, while the wealthier have natural gas piped straight to their homes, while Egypt continues to heavily subsidise petrol which is, by definition, only used by the richest segments of the society (i.e., those who own cars). [RE: Egypt is effectively lifting subsidies to the wrong people].

C) This new policy change is fundamentally weak, regressive and ineffective, and still does not come as part of a comprehensive reform plan. So it fails financially and morally, in my opinion. [RE: Couldn’t have put it better myself].

The biggest flaw in Egypt’s energy subsidy system (and many others around the world) is that it is a class-blind system that pays out more to support wealthier households whose fuel consumption is higher than in needier ones.

By lifting a subsidy specifically used by the poor, the Egyptian government is acting foolishly. The charts below show clearly how Diesel dominates the structure of subsidies, with LPG (used in cylinders) is a much smaller portion.

[caption id="attachment_1438" align="aligncenter" width="580"]Egyptian Center for Economic Studies Egyptian Center for Economic Studies[/caption]

The Morsi administration would be well advised to follow through with its plan to introduce a new fuel rationing system from July 1 to raise prices of fuel used by the well-off.

But like most policy changes in Egypt, this could easily be delayed for months and even into next year.

Egypt’s Untold Diesel Story

The people at Cairo-based brokerage firm Pharos Holding have sent investors a thorough breakdown of the reasons behind Egypt’s diesel crisis.

Titled “Diesel Crisis: Unquoted Figures and Untold Stories. The Secret behind Diesel Shortages in Egypt” the document sheds light on the country’s fuel crisis.

Pharos Research sourced diesel import data from the main government statistics agency, the Central Agency for Public Mobilization and Statistics (CAPMAS) to understand the nature and magnitude of the current diesel crisis. They found that diesel import statistics are extremely alarming in terms of magnitude, reasons and implications.

[caption id="attachment_1404" align="aligncenter" width="580"]diesel1 Egypt has been importing diesel at a much higher rate than normal[/caption]

Firstly: Diesel imports have been rising sharply and now make up about half of consumption, or around 9% of imports. 

The media quotes Egypt diesel imports at around 25% of annual consumption. However, CAPMAS figures show that the true figure jumped to around 50.0% and accounted for around 9.0% of Egypt’s merchandise imports, up from only 2.5% in 2007.

Secondly: There is a growing rift between EGPC and foreign partners. 

The reasons behind the surge in diesel imports and the current diesel shortage crisis is down to growing debts to foreign oil partners from the state oil company, Egyptian General Petroleum Corporation (EGPC).

But this rift has forced foreign partners to export their share of crude oil directly to third parties rather than sell it to the EGPC and risk further debt exposure. This has not only deprived Egyptian refineries from feedstock but triggered a surge in imports from foreign suppliers. 

[caption id="attachment_1405" align="aligncenter" width="580"]Foreign oil partners have been exporting their share out rather than selling it to EGPC Foreign oil partners have been exporting their share out rather than selling it to EGPC[/caption]

While the minister of petroleum said earlier this week outstanding liabilities to foreign partners have been settled ($ 6.5 billion), Pharos says liabilities have most likely been paid using the deposits of Qatar, Saudi Arabia and Turkey. Hence, Egypt has only managed to rollover rather than settle debt.

That’s not the only problem.

Although Egypt may have averted full erosion of its foreign reserves by delaying payments to foreign partners (yet at the expense of reputation and delays in upstream investments), it will not be able to defer payments to foreign suppliers (for imports). 

What is alarming is that Egypt has run out of cash for diesel imports due to the inability of EGPC to secure payment guarantees from local banks, as Rebel Economy has reported before.

If this continues and foreign reserves inflows remain muted, Egypt will have no diesel for energy subsidies.  It faces the prospect of food price inflation and social unrest that will pose huge challenges to political and economic stability.

This is exactly why Egypt has no choice over implementing energy subsidy reforms. The government must make normal Egyptians pay higher prices for fuel so that the administration can supply subsidies to those who really need them. 

Egypt Runs Out of Cash for Diesel Subsidies

A disturbing, but unsurprising leak from an unnamed official in Egypt’s finance ministry reveals that funds allocated by the government for diesel fuel subsidies have run out for the current year, with the Cabinet scrambling to find a solution, according to Egypt Independent:

An official source within the ministry has said that meetings are being held with Ministry of Petroleum officials to solve the crisis, adding that the government’s subsidies for diesel fuel are estimated at LE50 billion.

The two ministries are considering opening an additional source of credit for diesel subsidies through a law giving the finance minister the power to approve additional credits.

Rebel Economy has repeatedly called for a swift overhaul of the energy subsidy system. Read here for a round-up of why.

But in a nutshell, and according to industry sources, in 2002, EGPC’s total debt stood at half a billion Egyptian pounds.  In 2012, that debt pile has jumped to 200 billion pounds.

The organisation has also maxed out financing to fund oil and gas exploration from banks including National Bank of Egypt and Morgan Stanley.  

Sources say the magnitude of Egypt’s debt is such that at BP’s global board meeting, Egypt’s debt repayment plan is brought up as a topic of discussion.

The finance ministry has already been effectively paying the oil ministry to buy its domestic energy needs either from foreign partners exploring in Egypt, or by importing it from countries including Algeria and Saudi Arabia.  That was part of the reason foreign reserves fell so much.

The problem is based in the fact Egypt buys hydrocarbons at a high price, and sells at subsidised prices making it a costly system that wastes more cash than the country can afford.  The energy subsidy system, which already swallows up to 20% of government spending, is also fundamentally flawed, and shortages have lead to a parallel black market.

An Egyptian radio station over the weekend revealed the cost of butane cylinders used by many Egyptians at home has now gone up to about LE70 and LE80 on the black market.  A cylinder used to cost anywhere between LE8 and LE50 at the most.

Something has to give, but with further delays on implementing key subsidy reforms, it is not clear what this will be.

Funnily enough, the only official quoted in Egypt Independent’s story was Sherif Haddara, the new head of Egypt’s state-run oil company, the Egyptian General Petroleum Corporation. He quietly replaced Hani Dahi as the chairman of EGPC earlier this year, as Rebel Economy first reported this in November 2012.

Mr Haddara faces the country’s biggest challenge in managing the finances of the most indebted ministry in Egypt.

Breakfast Wrap: Egypt Scales Back Energy Subsidy Reforms

Over the weekend, Egypt released another “energy subsidy reform” announcement to add to the growing pile of releases that seem to disappear within days, with little follow-up.

Egypt is “working on a programme to cut the country’s energy subsidy bill by 50% over the coming five years and to compensate by raising Egyptian wages,” Ahram Online reported, citing the  the state-run MENA news agency.

And with the government expecting the full year bill on energy subsidies to amount to $16.3 billion, a substantial proportion of the state budget, it’s no surprise that Egypt wants to make cuts. Especially as the system, as it stands, benefits the richest the most, rather than the country’s poorest who depend on cheaper fuel for their livelihood.

However, there is a big problem with this announcement. Egypt is effectively scaling back its energy subsidy reform plan.  

Egypt had aimed, for a substantial part of 2012, to cut its energy subsidies by up to a third over the coming year as part of an ambitious plan to reform the economy.

More specifically, as Heba Saleh from the Financial Times wrote in October:

The reduction by E£40bn, or $6.5bn, in the current fiscal year, ending June 2012, is equivalent to roughly a third of the $17.2bn the government is estimated to have spent in the last fiscal year on fuel and electricity subsidies for industrial and domestic consumers.

Even almost a year ago, on New Year’s Day, 2012, Egypt came out with it’s New Years Resolution, as Reuters’ journalists wrote back then:

Egypt’s government will increase natural gas and electricity prices paid by heavy industries by 33 percent this month to narrow its growing budget deficit. 

Economists say cutting energy subsidies, which represent about 20 of total spending, is one of the few practical options the country has to cut the deficit.

At the time, the higher rates were part of a plan to shave 20 billion Egyptian pounds ($3.3 billion) off the deficit.  

But, unfortunately for Egypt’s already confused public, yet more mixed messages were to come. In September, Egypt’s government said it drafted a plan to reduce energy subsidies by 25.5 billion pounds ($4.2 billion).  Here, again the cuts were suggested as within a year.

At this point, determining which cuts the government will actually make, and how much it will shave off the energy subsidy bill have become obsolete.

But what is clear is that the government last year had pencilled in a quite substantial and quick reform and that is now changing.

For example, if the government cuts the energy subsidy bill by $4.2 billion (according to the September announcement) that is equivalent to a 25% reduction of a $16.3 billion energy bill.  

Cutting $6.5 billion from the total bill (according to the October estimate and based on a total annual energy bill of $16.3 billion), is equivalent to a near 40% cut of the total bill in a year.

So, if the government is suggesting cutting 50% of the bill but over 5 years, that’s a substantial markdown from earlier announcements, and should signal to readers that:

a) the government is realising the task of reducing subsidies quickly is much more difficult and contentious and is responding with softer plans, but more importantly,

b) while there is something to be said for a slow reform programme, Egypt is unlikely to recover quickly from its financial woes as long as energy subsidies exist in their current form, because they are such a huge weight on the budget.

So far, little real reform has happened.  In November 2012, the Cabinet approved cutting subsidies from the high-end 95-octane gasoline, used mostly by the middle and upper class for luxury vehicles.  But the more important coupon or smart card system that would see a nationwide impact on subsidy use is yet to be enforced.

Finally, we must consider the bigger picture in reforming energy subsidies. Right now, Egypt spends more on energy subsidies than on health and education combined.  What if the government made real reforms quickly that meant Egypt’s poorest didn’t have to rely on the black market for their fuel needs, but also benefited from billions of dollars redirected into health and education – two vital pillars of a successful welfare programme?